China remains Pakistans all-weather ally

China remains Pakistan's all-weather ally

Pakistan’s forex reserves continue to see healthy growth with the latest figures showing a $260M increase since the 1st of January, 2009. The total pool of reserves now stands at $10.21BN. With additional measures being taken to shrink the trade gap – which has already seen a major reduction – the reserves are expected to continue to rise. The $10.21BN amount does NOT include the bulk of the IMF package approved for Pakistan. An additional $4.5BN is still to be released by the IMF.

China has injected an additional $500M into Pakistan’s economy. Chinese businessmen and companies have been visiting the country frequently over the past several months, and Punjab Chief Minister Shahbaz Sharif’s successful trip to China also sealed several joint venture deals between the two countries. Chinese investments in Pakistan over the recent past now stand at $1.3BN.

Multiple factors are in play, which need to be taken into account to form a picture for where we will stand from the point of view of our economy, over the next year. Here is what we can look forward to:

  1. Continued IMF payments, totaling $4.5BN
  2. Shrinking trade gap, which was down to only $815M in December 2008. It has dropped significantly since it stood at $1.2B in December 2007.
  3. Continuing Chinese, Japanese, Saudi and UAE investments in Pakistan. Just this morning, Warid announced a $250M investment. Also this morning, there was news of a $470M investment announcement in Pakistan by a Japanese company, DTS.
  4. Supply of energy (oil and gas) on deferred basis by Saudi Arabia and Iran.
  5. Potential reduction of imports through establishment of local industry, such as cell phone manufacturing facilities. This can have a huge impact on reducing the import bill.
  6. Continuing momentum for the Friends of Pakistan group, who are creating many opportunities for joint ventures, FDI, opening of foreign markets to Pakistani companies and much more. Japan has come forward to host the next meeting of the Friends of Pakistan group. The previous meetings were held in the UAE where 14 countries, including the EU, Saudi Arabia, Turkey, China, the US and others, participated.
  7. Joe Biden, the new US Vice President, has been a big proponent of economic partnership with Pakistan. His most recent interviews detail his plans for tripling investments and credits to Pakistan to the tune of $1.5B every year, for the next decade. The first pillar of the Obama government’s strategy towards Pakistan is:
  8. “First, triple non-security aid, to $1.5 billion annually. For at least a decade. This aid would be unconditioned: it’s our pledge to the Pakistani people.”

  9. High growth in Pakistan’s exports to certain regions, like the UAE and Gulf countries, as well as in certain vertical areas, such as technology and defence.

Net net, all of this would lead to a fairly positive projection for Pakistan’s economy. The KSE still needs to recover, and we have to increase power generation. The latter piece at least, we’re working on. Pretty hard. With some fairly innovative projects already in play.

Even at a $810M monthly trade gap, Pakistan’s reserves provide over a year of coverage. And when you factor in the rapidly shrinking gap and the increasing inflows, partially detailed above, you see that the economy is back on its way to recovery and growth.

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